Irish bond yields hit euro-era high, banks sink

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Last Updated: Fri, Nov 26, 2010 12:30 hrs

Yields on Ireland's bonds reached a new euro-era high Friday as investors dumped the nation's debt securities, and Irish bank shares also kept falling in expectation the banks are heading toward greater state ownership.

Analysts said Ireland's bonds and banks are getting battered because deep skepticism remains that an international bailout loan — whose details are expected to be unveiled Sunday — will be enough for Ireland to resolve its debts.

Speculative media reports in Dublin and Brussels fueled nervousness, with claims that the International Monetary Fund and European Central Bank experts driving the loan talks in Dublin would like to make Ireland's senior bondholders — chiefly foreign banks — eat losses in Ireland's debt-crippled banks. The IMF and European officials made no official comment on the topic.

The Irish Times said an agreement on an €85 billion ($112.5 billion) IMF-EU loan for Ireland could be announced Sunday, one week after Ireland formally applied for a financial rescue. It would be used as a credit line by Ireland's government and banks, which both have been priced out of the bond markets.

Analysts say any effort to make bondholders share the bailout burden will roil markets further and risk driving up the borrowing costs of even the world's most credit-worthy nations.

The bonds of Allied Irish Banks and Bank of Ireland were particularly hard hit by Friday's speculation, quickly losing between 5 percent and 10 percent of their already weakened value.

Mark Ostwald, strategist at Monument Securities in London, said any effort to draw senior bondholders into the Irish bailout bill would set "a nasty, if situationally understandable, precedent."

Until now, Ireland has stressed that its financial laws give 100 percent protection to senior bondholders, just like depositors.

"The constant 'goal post moving' in terms of regulation ... does enormous damage to investor and entrepreneurial confidence," Ostwald said in a note to investors, adding that such talk will cause government bond yields to rise even in countries like the U.S, Britain, Germany and France.

Yields on Ireland's 10-year bonds rose to 9.22 percent from 9.02 percent Friday, a new high since Ireland joined the euro in 1999.

The shift in Ireland's fortunes has been swift. Three years ago, Irish yields were actually lower than equivalent German bonds, when Ireland was still the high-growth economic star of the 16-nation eurozone.

But Ireland's cost of borrowing has shot through the roof since the summer, as analysts increasingly reached the conclusion that the country — saddled with Europe's deepest deficit thanks to its €50 billion($67 billion) bank-bailout program — lacked the financial muscle to keep funding that effort.

In recent weeks, the level of short-term loans from the European Central Bank and Irish Central Bank to Dublin's six banks has surged to €130 billion ($173 billion) because other banks were pulling back from lending to the Irish financial sector and taking their deposits with them.

Ireland has already nationalized three banks. Three others still listed on the Irish Stock Exchange have fallen to record lows this week as investors expect the next bailout program to lead to their state ownership, too.

Irish Life&Permanent — the only Dublin bank not to receive a state bailout — fell 15 percent to a new low of €0.50.

Bank of Ireland, which is already 36 percent state-owned, fell 3 percent to €0.24. Allied Irish Banks, which is expected to fall under majority state ownership within weeks, fell 0.6 percent to just below €0.30.